MNI RBA STATE OF PLAY: Rates On Hold; Jobs, Inflation Eyed

--If RBA Forecasts Met, 2019 Could See First Rate Hike Since 2010

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia kept rates unchanged at a

record low 1.5% Tuesday, but if their economic forecasts are met, 2019 could see

rates rise for the first time since November 2010.

     The RBA cut its Overnight Cash Rate to 1.5% back in August 2016, as weak

inflation, low growth and higher unemployment undermined arguments for an

increase, even in the face of an earlier property boom.

     With both the global and domestic economic expansion continuing, however,

the Bank is now keeping a close eye on inflation, employment and wage growth

data as it ponders its next move, which it continues to guide will likely be

higher rates.

     Australian GDP grew at a healthy 0.9%in the June quarter and unemployment

has fallen to 5.0%, but inflation is stuck below the RBA's indicative range at

an annual 1.9%.

     The economy is seen "making gradual progress" but that any change in its

interest rate stance is premature, but if inflation moves into the preferred

range of between 2 and 3% and household spending increases, then the case for an

increase will become stronger.

     "A further pick up in inflation is expected given the tight labour market

and, in the United States, the sizeable fiscal stimulus," RBA Governor Philip

Lowe said in a statement accompanying today's Board decision. 

     Lowe said the forecast for inflation was 2.25% in 2019 and "a bit higher"

in 2020, which combined with the positive outlook for the labour market could be

the factors which prompt a rate rise. 

     --GROWTH PICK-UP

     The current low level of interest rates is still seen by the RBA as a

support to the Australian economy, while also contributing to a lower dollar

which is driving exports.

      "The Australian economy is performing well. The forecasts for economic

growth in 2018 and 2019 have been revised up a little," Lowe said. "The central

scenario is for GDP growth to average around 3.5 percent over these two years,

before slowing in 2020 due to slower growth in exports of resources".

     The forecast for the unemployment rate is for a further decline to 4.75

percent in 2020, a trend which could drive a lift in wages which would also fuel

inflation. 

     "Further progress in reducing unemployment and having inflation return to

target is expected, although this progress is likely to be gradual," Lowe said.

     --HEADWINDS

     Despite the positive outlook the RBA identified both global and domestic

risk factors.

     The trade policy of the U.S. under President Donald Trump was creating

"ongoing uncertainty regarding the global outlook," the RBA said.

     Another continuing source of uncertainty is the outlook for domestic

household consumption. Income growth remains low, debt levels are high and some

asset prices have declined, while a punishing drought in regional Australia has

created difficult conditions for the agricultural sector.

     The rise in property prices peaked in late 2017 and the market has fallen

since then, with national residential house prices down 2.7% over the last year,

but the RBA does not see this as a major factor.

     Rather, the RBA view is that the property market is more sustainable with

lower demand from investors and that although credit is tight for owner

occupiers, demand remains "robust."

     "Credit conditions are tighter than they have been for some time, although

mortgage rates remain low and there is strong competition for borrowers of high

credit quality," Governor Lowe said.

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